OST-95-277 (50234) / Western Pacific / May 29, 1997

Application of

for an exemption from 14 C.F.R. Part 93, Subparts K and S. pursuant to Section 206(c)(1) of the Federal Aviation Administration Authorization Act of 1994.

Western Pacific Airlines, Inc. (Western Pacific) hereby moves for leave to file this supplemental response providing updated information with respect to the levels of service, traffic and fares in the Colorado Springs-O'Hare International (O'Hare), Colorado Springs-Midway (Midway) and related markets. For the reasons set forth herein as well as those set forth in its Petition for Reconsideration and previously-submitted Supplemental Responses, Western Pacific urges that the Department, upon reconsideration, grant the requested exemption so as to permit Western Pacific to provide much-needed competition in the Colorado Springs-O'Hare market.

On May 10, 1995, Western Pacific filed a Petition for Reconsideration of Order 95-4-33, urging that the Department reconsider its determination to deny Western Pacific's request for slots at O'Hare International Airport. Since the filing of that petition, Western Pacific has had almost two years of operating experience in the Colorado Springs-Midway market, and is now able to discuss the competitive effects of its presence in these markets using the Department's own data through the 4th Quarter of 1996 (the most recent quarter for which the Onboard data is available). In order that the Department may have a complete record upon which to decide Western Pacific's Petition for Reconsideration, Western Pacific respectfully requests leave to file this supplemental response.

In denying Western Pacific's request for slots to provide service in the Colorado Springs-O'Hare market, the Department found, in essence, that, because United already provided service in the Colorado Springs-O'Hare market, Western Pacific had not met the "exceptional circumstances" criterion of Section 206(c)(1) of the Federal Aviation Administration Authorization Act of 1994 (Act).

Subsequent to the Department's decision, the General Accounting Office (GAO) issued a report which found, among other things, that deregulation's benefits stem largely from increased competition spurred by the entry of new airlines into the industry and established airlines into new markets. "Airline Deregulation: Changes in Airfares, Service, and Safety at Small, Medium-Sized, and Large Communities" (April 19, 1996). In October 1996, the GAO issued another report in which it stated that little progress has been achieved in lowering the barriers to entry since GAO first reported on these barriers in 1990. "Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets." In particular, GAO found that the full benefits of airline deregulation have yet to be realized, pointing to slot controls, restrictive gate leasing arrangements, and perimeter rules as impediments to entry at key airports in the East and upper Midwest. The GAO also found that several marketing strategies, such as travel agent commission overrides and frequent flyer programs, give advantages to established carriers, advantages which are greatest -- and airfares the highest -- in markets where the dominant carrier's position is protected by operating barriers.

Focusing specifically on the slot-controlled airports, the GAO reviewed the findings of its August 1990 report entitled "Airline Competition: Industry Operating and Marketing Practices Limit Market Entry," which found that a few established carriers had built upon the favorable positions they inherited as a result of grandfathering to such an extent that they could limit access to routes beginning or ending at any of these airports. And by October 1996, this level of control over slots by a few established airlines had increased even further as may be seen from the following table demonstrating the decrease in competition at O'Hare International Airport:

Table I

O'Hare International Airport

In that report, the GAO pointed out that the Section 206(c)(1) new entrant exemption authority, which is the subject of Western Pacific's application, has resulted in little new entry because DOT has interpreted the "exceptional circumstances" criteria very narrowly. DOT has only approved applications to provide service in markets not receiving nonstop service, even if the new service would result in substantial competitive benefits. Significantly, the GAO found no Congressional guidance to support this interpretation.

In its January 1997 response to the findings of the GAO's report, the Department indicated that it would include competitive benefits as a factor when determining whether to grant slots to new entrants under the "exceptional circumstances" criterion. Western Pacific is encouraged by the Department's positive response to the GAO's recommendation, and hereby submits the following information, based on the Department's own data, which demonstrates the important competitive benefits which would result from Western Pacific's entry into the Colorado Springs-O'Hare market.

Turning initially to fares, Table II sets forth the effect that entry by new entrant low-fare carriers has had in the Colorado Springs-O'Hare, Colorado Springs-Midway and the Denver-O'Hare markets. As may be seen in the Colorado Springs markets, United had historically maintained very high fares in the Colorado Springs-O'Hare market. With the entry of Western Pacific in the Colorado Springs-Midway market with its low fares in the second quarter of 1995, however, United's fares began to come down dramatically. And, if the Department were to grant Western Pacific the slots necessary to provide service in the Colorado SpringsO'Hare market, United's fares in that market would be forced to come down even further. A very similar situation existed in the Denver-O'Hare market, where United's and American's fares have been affected by new entry in the market. See Table II. There, Continental's low fares during the period from the 3rd Quarter of 1993 through the 3rd Quarter of 1994 clearly had an impact on the high fares that United and American charged in the local market before and after Continental's low fare service in the market.

As demonstrated in Table III, not only has the public benefitted from lower fares, but the total traffic and capacity in the Colorado Springs-O'Hare and Colorado Springs-Midway markets has tripled, from 32,951 onboard passengers during the 1st Quarter of 1995 to a total of almost 98,000 passengers in the 4th Quarter of 1996 and from 50,441 seats to over 148,000 seats during that same period.

And, these important public benefits have not come at a cost to the incumbent carrier in the market. Indeed, after United began to charge lower fares in the Colorado Springs-O'Hare market, its onboard traffic and revenue in the market more than doubled, it doubled capacity in order to meet this demand and still maintained load factors at levels comparable to those it achieved when it had only half the capacity in the market, thus demonstrating that both the public and incumbent carriers can benefit when fares are reduced.

Finally, while there is no question that Western Pacific has had an impact in the local Colorado Springs-Chicago air travel market (and will have an even larger impact if it is permitted to compete head-to-head with United in the Colorado Springs-O'Hare market), the grant of slots to Western Pacific to provide service in the Colorado Springs-O'Hare market will permit it to provide competition in the all-important O'Hare connecting market. As the Department is well aware, O'Hare International Airport is a critically important connecting airport in the U.S. air transportation system, and, as set forth in Table IV, United carries 2-1/2 times more connecting than local traffic in the Colorado SpringsO'Hare market. And, once Western Pacific were given slots with which to provide service in the Colorado Springs-O'Hare market, significant benefits will flow to this substantial amount of connecting traffic.

Finally, Western Pacific has obviously made changes to its schedules since the date of its original application. Consequently, Western Pacific requests that it be allocated sufficient slots to operate two daily roundtrips between Colorado Springs and O'Hare, with O'Hare arrival times of 2:15 p.m. and 9:00 p.m. and O'Hare departure times of 8:00 a.m. and 2:55 p.m. There is, of course, some flexibility in these operating times and western Pacific would be pleased to work with the FAA on alternative times, but these would be the times preferred by Western Pacific.

WHEREFORE, for the foregoing reasons as well as those set forth in its Petition for Reconsideration and Supplemental

Responses, Western Pacific Airlines, Inc. respectfully requests the Department of Transportation to reconsider Order 95-4-33 and award Western Pacific a total of four slots at O'Hare International Airport as specified herein.

Respectfully submitted,

John E. Gilllck

WINTHROP, STIMSON, PUTNAM & ROBERTS

1133 Connecticut Avenue, N.W. Suite 1200 Washington, D.C. 20036

(202) 775-9800

Counsel for Western Pacific Airlines, Inc.

May 29, 1997